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World recession now a strong threat



By CNN's Alex Frew McMillan

HONG KONG, China -- Asia braced Wednesday as it felt the initial fallout of the attacks in the United States.

With many countries in Asia heading into or suffering recession, the immediate fear was that the disaster would precipitate another financial crisis in the region.

"It's possible, I think at the moment everything is possible," Frank Gong, chief economist at Bank of America said. "It's too early to judge the impact. It just makes the matter even worse at an already bad time."

The risk of a global recession is high. Much of the world has been looking to the United States to lead an economic rebound.

Tuesday's assaults on the World Trade Center buildings and the Pentagon brought U.S. business and industry to a halt. The blow to the world's economic powerhouse came at a time the United States and the rest of the world could ill afford.

"We're going down to the bottom"

The last U.S. recession, in the early 1990s, was triggered by the Gulf War. Tuesday's collapse of the World Trade Center twin towers and a direct hit on the Pentagon instilled a sense that the country was again at war, against a mysterious terrorist opponent.

Americans reached Wednesday said they felt the country was under attack. Comparisons were made to the Pearl Harbor attack that pushed the United States into World War II. Fighter planes roared over Boston, New York and Washington, D.C.

The U.S. economy has already been slowing, and a key prop, consumer confidence, has just started to falter.

The blow to some of the most symbolic and important buildings in the United States, as well as the practical impact of the gridlock in Manhattan and Washington, D.C., could shatter consumer confidence.

"There was a delicate balance in consumer confidence," said Andy Xie, an economist with Morgan Stanley in Hong Kong. "It's tipped over."

Xie said the impact of Tuesday's attacks will be much more severe than the Gulf War. It raises the specter of worldwide recession, something that was already a worry.

Is worldwide recession a risk? "Yes, absolutely," he said.

"We're going down to the bottom," Xie said. "No one knows where that is."

All of Asia affected

Japan, the world's second-largest economy, has increasingly relied on the United States to lead it out of a prolonged slump. It is about to enter its fourth recession in a decade, economists say.

Those hopes of a U.S. turnaround took a heavy blow. Japan watchers have said its exports need to recover for its economy to heal as a whole. With chances of that now slight, Japan's prospects have virtually nothing to pick them back up.

That would be a double disaster for economies elsewhere in Asia. They are some of the most export-dependent nations in the world.

Economies like Singapore, Malaysia and Taiwan rely heavily on shipments to the United States, their largest market. Japan is typically the key Asian trading partner and No. 2 destination for Asian goods.

The Philippines, Thailand and Indonesia have also yet to work themselves free from the effects of the Asia crisis that started in 1997. With structural problems at home and a worsening of already weak overseas demand, there will be little to help them, experts say.

Even the most robust economy in Asia, China, has been relying more and more on sales to the United States, particularly of electronics goods. Those will now take a sharp dip, as will other countries' key shipments, such as South Korean and Japanese car exports.

Selling anything uncertain

The Asian markets that were open reflected the pessimism. Coincidentally, both Japan's Nikkei index and Hong Kong's Hang Seng index collapsed through separate 10,000 barriers on Wednesday.

The Nikkei was down 6.1 percent at 9,661.57 in early afternoon. The Hang Seng was down 8.9 percent at 9,494.90 at noon.

The markers are artificial but still psychologically key. Traders and investors ran from any risk-oriented product or investment, stocks being one of the riskiest.

"At the moment, everything is uncertain, and the market wants to put a risk premium on everything," Gong said.

They sought safety in commodities, driving up the price of gold. Oil prices in particular soared, as the prospect of a U.S. retaliation affecting supply from the Middle East loomed.

A combination of rising oil prices and an economic slowdown would be disastrous, raising the specter of the "stagflation" seen in the United States in the 1970s. Higher oil costs raise the prospect of inflation. That prevents central banks from lowering interest rates.

Higher oil has a "taxation" effect on consumers, too. They still have to travel but end up paying higher costs to do so, at a time wages are suffering.

Though many investment banks in Asia stopped trading many products on Wednesday, markets were pricing in a half-point U.S. interest rate cut.

Asian investment and commercial banking operations were also trying to find out what had happened to their employees in the United States. Some 20 Japanese companies operated in the World Trade Center buildings.

U.S. investment bank Morgan Stanley was the largest tenant there. A spokeswoman in Asia said its operations were fully functioning in Asia.

It and other trading companies -- Cantor Fitzgerald took up five floors near the top of 1 World Trade Center -- were awaiting word of employees in New York.

"We have limited information on the disaster," Morgan Stanley said, in a release. "Our immediate focus and concern are for the well-being and safety of Morgan Stanley employees."







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